UK Treasury chief unveils $52 billion tax hike budget, promising more investment

LONDON (AP) — British Treasury chief Rachel Reeves told lawmakers on Wednesday that taxes would rise by 40 billion pounds ($52 billion) to cover hole in public finances and provide new funding for cash-strapped UK public services in a sweeping budget statement that could set the tone for years to come.

In Labour’s first budget since returning to power earlier this year after 14 years in opposition, Reeves also changed the UK’s debt rules – a move that will allow the government to borrow more or, as she explained, “invest, invest, invest”.

Its biggest monetary commitment was an additional £25 billion for cherished National Health Servicewhere waiting lines have risen to record levels since the coronavirus pandemic.

“The choice I made today is the right choice for our country,” she said at the end of her speech, which lasted most of 80 minutes. “To restore stability to our public finances. To protect workers. To fix our NHS. And restore Britain.”

The overall tax increase, which is the largest in three decades, is largely driven by increases in taxes that businesses pay to employ people. Reeves said this was necessary because of the economic “black hole” left by the previous Conservative government.

According to the independent Office for Budget Responsibility, the UK’s overall tax burden is forecast to rise from 36.4% of annual UK GDP in 2024/25 to a “historic high” of 38.3% in 2027/28.

The biggest single tax increase – £25 billion – comes from a 1.2 percentage point increase in national insurance contributions paid by employers. The levy, which pays benefits and helps fund the NHS, will remain unchanged for employees. Reeves insisted many small businesses would not be affected because she doubled the wage threshold at which they would start paying them.

Additional billions will also come from raising the capital gains tax and closing loopholes in the way inherited money is taxed, while other revenue will come from potentially politically attractive sources such as those who use private jets or send their children to fee-paying schools. One tax that surprisingly remained unchanged was the levy that drivers pay at the pump, while taxes on most alcoholic drinks were increased – but a pint of draft beer or cider was cut by a penny.

In addition to raising taxes, Reeves also increased spending in a number of departments other than health care. For example, schools will receive more funding this year to fund breakfast clubs for young pupils and upgrade facilities.

It also set aside £11.8 billion to compensate those affected by contaminated blood scandal In the 1970s and 1980s, tens of thousands of people became infected with HIV or hepatitis from transfusions of contaminated blood and blood products. It also allocated £1.8 billion to compensate victims of the attack. Horizon Post Office scandalwhich resulted in hundreds of branch managers being wrongly convicted of theft and fraud as a result of a faulty computer system.

The centre-left Labor Party was elected on July 4 after promising to end years of turmoil and scandal under Conservative governments, grow Britain’s economy and restore crumbling public services. But the scale of the measures announced on Wednesday by Reeves was not mentioned during Labour’s cautious general election campaign or in its government manifesto.

Rishi Sunak, former prime minister who leads the Conservative Party until the weekend when his successor is announced, said the Budget was “broken promise after broken promise” and that “working people will pay for it.”

During the election, the Labor Party said that taxes on so-called “working people” (a term whose definition has been hotly debated in the media for weeks) would not be increased. Although Reeves did not raise income or sales taxes, the increase in employers’ national insurance contributions is likely to have an impact for some time, with Sunak saying it was a clear breach of Labor Party commitments and would lead to lower wages.

Since his election with a landslide victory, Prime Minister Keir Starmer and Reeves said they inherited an economy that was in much worse shape than they thought. But they say there will be no repeat of the austerity measures that marked the early years of the previous Conservative government after it was first elected in 2010.

Reeves said her budget, which also included a significant increase in borrowing, was needed to “fix the fundamentals” of the economy, which she argued had been undermined by 14 years of Conservative rule.

Conservatives say they left an economy that was growing, albeit modestly, with debt on a downward trend.

Reeves, Britain’s first female chancellor of the exchequer and a position she has held for some 800 years, also said she was adjusting public debt rules to take into account both assets and liabilities. Essentially, this change would free up billions more dollars for investment in health care, schools, transportation and other major infrastructure projects, especially as we transition to net zero.

While the budget may be the most significant since 2010 following the global financial crisis, Reeves will no doubt be careful not to cause worries in financial markets. Two years ago short-lived premiership of Liz Truss collapsed after a series of unfunded tax cuts roiled financial markets and sent borrowing costs soaring.

Early signs point to some nervousness in markets, with interest rates on British government debt rising following Reeves’ announcement.

Part of the reason is that big changes in taxes and spending don’t seem to have much impact in supporting the economy. The Office for Budget Responsibility, which provides economic forecasts, said the economy would gain momentum in the next couple of years, but growth in subsequent years would be lower than previously thought.